Friday, 25 June 2010

Reverse Mortgage – Part 1

Like so many elders, I lost a lot of money in the financial crash of 2008. There was not all that much to begin with, but enough to augment my Social Security benefit so that without undue effort, I could live comfortably, if frugally. Frugally compared to my working years, but not difficult. I didn't feel deprived.

A large chunk of my loss was due to the Lehman bankruptcy from which I will eventually see only pennies on those tens of thousands of dollars. And because, on the day of the crash, I put all remaining funds into a cash account at a miniscule, if not quite nonexistent, interest rate, since then I have not had the monthly earnings I had counted on to ease my old age.

Don't get me wrong. I am not in danger of needing a food pantry or government help in paying Medicare premiums. But I do live close to the bone and any out-of-the-ordinary expense – an unexpectedly high veterinary bill, for example, auto repair or a denture as I recently needed – means further reducing my savings or running up a high-interest-rate credit card debt. Neither is a comforting option.

Undoubtedly some of you – braver sorts than I – have benefited from market returns since the crash and would advise me to reinvest. I am not ready to do that. Even the word “invest” gives me a stomach ache. In an economic environment that still feels uncertain to me, I don't have enough money to take those chances again and until I can think about investing without vomiting, it is not a place for me to be.

I am telling you all this because after much reading, note-taking, thought and consideration over several months, I have decided to seek a reverse mortgage. Further, I believe it would be beneficial for many TGB readers who might want to consider this move to follow along through each step of a real-life experience as I investigate the possibilities, seek the best advice and make the necessary decisions.

One of the problems with reverse mortgages is that the business has a poor reputation and the people who deal in them feel sketchy. The television commercials and email solicitations, whose numbers are increasing, sound like fly-by-night operations and in fact, a consumer advisory brochure from the comptroller of the currency at the U.S. Department of the Treasury titled, Reverse Mortgages: Are They for You? [pdf], includes this warning:

“Be wary of anyone trying to sell you other products along with a reverse mortgage. Because a reverse mortgage can give you access to a large amount of funds, it can make you a target for aggressive sales pitches for expensive and inappropriate products and services.

“You should generally steer clear of anyone trying to sell you other products – such as annuities long-term care insurance, investment prorams, or home repair services – along with a reverse mortgage.”

Five years ago, when I had been unable to find work for a year and was looking into how I might be able to afford to remain in my home in Greenwich Village years before I had intended to retire, I looked into reverse mortgages. My research then revealed an industry fraught with potential bad guys so slick they could skin me alive before I knew what had happened. So much so, that I gave up the idea and sold my home.

What has changed since then is that I met Saul Friedman. As you know, he writes the Saturday Gray Matters column on this blog and also contributes two Reflections columns a month.

He has recently written two stories on the benefits to elders of HECM reverse mortgages, a type I missed or misunderstood five years ago, but is insured by the federal government making them safe for both borrower and lender. You can read Saul's two reverse mortgage columns here and here.

If my new home in Oregon, on which there is no mortgage, is worth what I paid for it, and if the various reverse mortgage calculators around the web are correct, I could increase my income by about 40 percent. That is, if I took the mortgage as monthly payments; there are other options.

I don't need that much, but it would give me some financial breathing room and reduce anxiety about inevitable unexpected or even anticipated expenses that don't fit into the current budget.

But I'm getting ahead of myself.

The story of my search for a reverse mortgage will appear here about once a week or whenever there is enough new information for an update. I will do my best to get the people I meet along the way on the record here. I will steer you toward the best information on the web. I will do everything possible to get your questions answered.

Also, I will give you enough detail about my reverse mortgage so you understand the process – although not so much that you know everything about my financial situation. (Come on now – you're not entitled.)

One of the requirements for an HECM (FHA-guaranteed reverse mortgage) is a counseling session with a HUD-licensed reverse mortgage expert who explains all details – the upsides and down – of reverse mortgages. I've done enough reading to believe that a reverse mortgage is a good choice for me, but I am moving forward slowly and carefully, and may learn something new that changes my mind.

So we will take this critical journey together. I hope it will be useful to you in your financial decision-making.

Is this what we call in the UK 'equity release'? In other words you borrow money against your property in exchange for a share in the value when you die. I looked at that a couple of years ago as a way of getting funds for my daughter to buy her own place - I was for once too young! (At least in terms of it making financial sense for me)

Thanks for bringing up this topic,Ronni. There are quite a few people who could benefit from this reverse mortgage but are afraid to look into it because of all the "Bad guys" out there who would try to take advantage of the situation.

The information that I have read about it has one very important precaution. DO NOT sign a QUIT CLAIM deed. I'm not certain why they say this but I know we can trust you and Saul to find out for us...Thanks!

Ronni, I am looking forward to the information you share. My circumstances a lot similar to yours.
In the last year I moved back to my old home place and built something smaller and cost of living is less expensive in this area. Taxes are about 50% less. My city home was sold at a 20% loss. Very small ss benefits as a young wife I did a stupid thing. Thinking marriage was forever and our family business income came in the form of a check I made out in my husbands name - when I was working daily running the office. Here I made out the check and took care of all finances. Consequently I built up very little ss credit. So what you are doing I may do in the future.

As the wife of an aging/aged husband with health problems I will hold onto this information, it may be my lifeline in the years to come. Thank you once again for providing valuable information to those of us panning for gold in our twilight years.

I have investigated reverse mortgages in the past and may need to get one in the future. I appreciate the hard investigative work you will be doing, Ronni, and will save the information for further use.

As of now I am able to live comfortably on SS income, but big luxuries are out. If I could still travel I would probably get a reverse mtg. so I could see a few more countries before I die.

I consider a reverse mortgage my 'ace in the hole' and will not get one until necessary.

I'll be interested to see what you come up with. My great aunt did this and outlived the mortgage--she died at 98.
Because the bank holding the mortgage was going to sell her home out from under her, my parents had to step in and buy the house so she could continue to have a place to live. She lived for about 10 years longer as I recall. Hopefully these mortgages have better protections now!

If it doesn't pass "the sleep test" you shouldn't invest. The "vomit test" is an even stronger indicator! Looking forward to having you do the research on a topic I've thought of but never investigated. Thanks, once again, for leading the way.
a/b

A topic that needs investigation. Although we won't have to do this, plenty of our friends are contemplating reverse mortages, mostly because they expected to be better off than they are in retirement.

The subject of reverse mortgages is one that most people don't understand very well--myself included. Like you, Ronni, my husband and I lost a percentage of our retirement savings during the recent recession. (Didn't everyone, except the fattest of cats, who made out like the bandits they are!) We were relatively fortunate thanks to an astute financial advisor.

We don't need a RM now, but the time may come. It would be a huge help to know how to proceed and what to look out for. The fact that we still have a small conventional mortgage may make us ineligible--that would be one of our first questions.

Other than stocks that "always go up", I can scarcely think of a scarier product than one that enables some bankster sleeze to turn elders out of paid-for homes with confusing or fraudulent "deals," a thing that is happening far too often.

I'll never forget my father's "financial adviser" when I was settling his estate some time ago. I was a kid then (in my early 50s) and I've learned a lot since. One of the things I learned that everyone over 50 (to a certain finance type) is a Dotty Old Grandma who will, one way or another, be buying him/her a boat.

My father was a sharp man, but health problems overwhelmed him, and the "adviser" had him way overloaded with risky funds. His distress over his paper losses during the 2001 crash probably contributed mightily to his death, not an event the "adviser" seemed to lose much sleep over.

The lessons:

1) It's OK to be scared of risk. In fact, it's a sign of sanity.

2) Never forget who we are to the "financial services industry": Lunch.

Your story is what I tell potential borrowers all the time. Do your due deligence in research. Obtain advice from a trusted source. Making educated decisions begin with undoing commmon misconceptions that keep many senior homeowners from looking into the advantages of a reverse mortgage.

For those looking to supplement their income, prepare for unexpected expsenses, or plan for future financial needs, a reverse mortgage my be just the solution to help one enjoy a more comfortable retirement.

Reverse mortgages --specifically HECMS -- can be a very good deal, if you are careful. AARP is a great place to start; because you've already checked their calculators, you know that you will not get anywhere close to the complete value of your home. And, as long as you live in your home, the loan cannot will be due and payable even if you use up the entire amount.

I think you are too young for a reverse mortgage. My understanding is that you should save that option for later in life, around 80 or so.

Personally, I don't understand why you do not accept advertising on this site. As a constant reader, I would be glad to see advertisements here, because that would mean that you were getting some kind of compensation for your important work. You have created a well-respected, well-read site, and you should profit from it.

I would much rather there be advertising on this site, than have you feeling like you need to take financial risks.

Good luck with your research. You have a very thoughtful approach to this unique financial tool.

By way of information you can check:
You CAN get a reverse mortgage if you still have a small mortgage,if the mortgage is small enough to pay off with some of the reverse mortgage proceeds. In fact, some people use a reverse mortgage to get themselves "out from under" a mortgage with a payment they can no longer afford.